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Education Series: Single-Stock ETPs

Coinbase: Decrypting Access to Crypto Markets

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

There is no denying the fact that cryptocurrencies are here to stay. With declining purchasing power of the U.S. dollar and concerns over inflation looming, it is natural for investors to seek a means to shore up the value of their liquid cash. In a recorded interview at CoinDesk’s Consensus 2021 conference held on the 24th of May, even billionaire hedge fund investor Ray Dalio stated that he would rather own Bitcoin than bonds.

However, some investors might be concerned about the volatility and durability of cryptocurrencies, despite the enormous interest in the crypto space. To profit from that interest without directly being invested in cryptocurrencies, Coinbase might be the answer.

A Leading Transaction Hub

Founded in San Francisco in 2012, Coinbase is one of the world’s largest cryptocurrency exchanges and valued at almost $50 billion today. Initially offering services only for Bitcoin (BTC), the company went on to extend its services for many other cryptocurrencies – collectively known as “altcoins” – provided they are decentralized via blockchain.

Currently offering over 25 cryptocurrencies for investment, trading and staking, Coinbase has consistently ranked among the most liquid exchanges for cryptos. This particularly proved helpful in recent times. BTC was worth less than $5,000 before the pandemic. Fast forward a year later, it surpassed $60,000 as many investors pumped a portion of their stimulus handouts into owning a piece of the now-burgeoning cryptocurrency space.

Also pertinent to the Coinbase success story is its customer-facing experience: the platform can be accessed through Android or iOS devices but does not offer any downloadable trading software. While geared to beginner investors, the experience is completely browser-based.

A point of criticism has been Coinbase’s relatively high – and confusing – usage fees. The company thus offers Coinbase Pro to more advanced investors, which comes with lower commission fees, advanced charting features, as well as the option to execute margin trading.

Thus, the company has a rather well-bifurcated customer offering: its Coinbase platform is a simple on-ramp to crypto investment for novice investors while its Coinbase Pro platform offers a more complex and robust trading experience to investors when they’ve gained a bit more experience with the world of cryptos. However, many experts say that a “race to the bottom” phenomenon that took place in late 2019 with stock trading fees with the growing popularity of Robinhood will likely make its way to the crypto trading space, as more and more Coinbase competitors attempt to carve out market share.

It also bears noting that cryptos are not considered legal tender and thus not backed by the protective mechanisms of the SIPC or FDIC. To alleviate this concern, the company provides insurance by pooling Coinbase balances and holding them in USD custodial accounts, USD denominated money market funds, or liquid U.S. Treasuries.

Coinbase has built a fairly solid reputation as a secure place to buy and sell crypto. To protect investor balances, the company states that 98% of customers’ funds are stored offline in various locations around the world. The company offers a free wallet to hold investors’ cryptos but a customer can opt for a third-party wallet as well.

Competitive Landscape and “Winter” Concerns

One source of concern in the competitive landscape has been the rise of decentralized exchanges or DEXes. DEXes are peer-to-peer networks for swapping digital tokens, unlike a centralized marketplace such as Coinbase. Unlike in Coinbase, DEXes don’t require users to hand their digital tokens to the exchange to be able to trade – a prospect deemed quite appealing to traders concerned about hackers who have been known to target crypto exchanges to steal tokens.

In April, over $122 billion in transactions took place on DEXes, up from less than $1 billion a year earlier. Uniswap, the closest DEX competitor to Coinbase, recorded volumes of $36.6 billion in April, basically 1/3 of the $110 billion at Coinbase.

There is a key point of difference from a regulatory perspective: Unlike crypto exchanges, DEXes generally don’t have safeguards against money laundering or “KYC” measures to confirm the identity of platform users. This is bound to raise the prospect of prohibitions and punitive actions from governments in the near future.

Another source of concern that affects both centralized and decentralized exchanges has been the prospect of a “crypto winter”: a phenomenon that occurs when investor interest in cryptos drop, leading to selloffs and conversions of cryptos into fiats. Recent fall in crypto prices led investment firm Mizuho to slash Coinbase’s target price by almost 30% down to $225, citing this phenomenon as the core reason for Coinbase prospectively not being able to collect as much in fees.

Tracker Advantage

A comparison of Coinbase’s stock price (COIN) versus BTC – widely considered to be the “gold standard” among cryptos – since the former’s listing show that there is a pretty strong trend with a slight advantage in COIN:

Hence, investors looking to get exposure to the crypto space without directly investing in cryptocurrencies may find that investing in a company like COIN is a viable alternative.

References:

  1. Upstart Peer-to-Peer Crypto Exchanges Take Aim at Coinbase, Wall Street Journal
  2. How another ‘crypto winter’ could affect Coinbase’s stock price, according to Mizuho, CNBC
  3. Coinbase Users Say Crypto Start-Up Ignored Their Pleas for Help, New York Times

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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